Royal Dutch Shell raised its dividend on Thursday, insisting it could afford higher payouts even as the oil and gas company navigates the twin challenges of the pandemic and the shift towards lower carbon energy.
The Anglo-Dutch group said its cash flows and performance gave it confidence to resume paying higher dividends, just months after the company made the first cut to its payout since the second world war.
A lack of clarity on its future capital allocation and payout targets had drawn criticism from shareholders, and since the dividend cut in April, Shell’s stock has tumbled to a 25-year low amid a broader oil market malaise.
In plans laid out alongside its results on Thursday, Shell said it would increase its dividend by 4 per cent to 16.65 cents in the third quarter, and lift it each year from now on. The April cut slashed the payout by 66 per cent to 16 cents.
“We are starting a new era of dividend growth,” said Ben van Beurden, chief executive. “Our sector-leading cash flows will enable us to grow our businesses of the future while increasing shareholder distributions, making us a compelling investment case.”
Shell’s shares were up 4 per cent in late afternoon trading.
Shell is pursuing a net-zero emissions goal as pressure to tackle climate change mounts, but has been scrambling to come up with an updated corporate strategy before February that satisfies shareholders.
Like rivals, the company is seeking to forge a plan for the energy transition while it grapples with an oil price dragged lower by governments’ ongoing efforts to stem the spread of Covid-19.
For the third quarter, net income adjusted for cost of supply — Shell’s preferred profit measure — dropped to $955m. This compared with $4.8bn in the same period a year ago, but surpassed analysts’ estimates of $146m.
The declines from last year reflected lower oil and gas prices, weaker refining margins and a reduction in production volumes. It was only partially offset by lower operating expenses and strong marketing margins.
Brent crude has recovered from 18-year lows hit earlier this year but has struggled to reach much more than $40 a barrel, with companies such as Shell braced for a prolonged period of lower prices.
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Mr van Beurden warned that the challenges posed by the pandemic were “unmatched”.
Shell was already under pressure before the coronavirus crisis erupted, with weaker refining margins and challenging economic conditions pushing it to slow shareholder distributions and alter its debt reduction targets.
This year it has suspended share buybacks, slashed capital spending, cut costs dramatically, issued bonds and secured new credit lines. It is also streamlining its business and announced up to 9,000 job cuts this month.
The company reported cash flow from operations at $10.4bn in the third quarter, from $12.3bn last year.
Once the company has hit a net debt target of $65bn, from current levels of $73.5bn, Shell said it will aim to distribute 20-30 per cent of cash flow from operations to shareholders through dividends and share buybacks.
Despite new pledges to take action on climate change, its shares have fallen about 60 per cent this year. Some investors and environmental activists are pushing Shell to increase spending in cleaner energy even as returns from those operations are not yet able to match those of its traditional business.
The company said on Thursday that 2019 would mark the “high point” for hydrocarbon production and in the future it would be focused on nine regions including Brazil, the Gulf of Mexico, Kazakhstan, Nigeria and the UK North Sea.
The company added that it would cut the number of oil refineries from 14 sites to six “energy and chemical parks”. Its gas business and marketing division will become key areas of growth as will its new power business.
Mr van Beurden confirmed the company will appoint a new chairman next year at the end of Charles Holliday’s term. Investors and analysts believe Andrew Mackenzie, the former chief executive of miner BHP who joined the oil major’s board in March, is in pole position to succeed in the role.
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